Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1698946076911.pdf (Uganda)
PARLIAMENT OE UCANDA e REPORT OF THE COMMITTEE ON NATIONAL ECONOMY ON THE PROPOSAL BY GOVERNMENT TO BORROVI USD lOO MILLION (APPROXTMATELY UGX 38O BILLIONI FROM THE DOMESTTC MARKET TO FINANCE CLASSIFIED EXPENDITURE UNDER MINISTRY OF' DEFENCE AND VETERAN AFFAIRS FOR FY ?OLAIIg 2.
( Office of the Clerk to Parliament Parliament Building Kampala !^rv hIARCH 2079 llxl,fr' 1.O INTRODUCTION A Motion for a Resolution of Parliament to authorize Government to borrow up to USD 100 million (UGX 380 billion) from the domestic market to finance classified expenditure was presented to the House by the Hon.

Minister of Finance, Planning and Economic Development on 18fr December 2018, and was accordingly referred to the Committee on National Economy for consideration.
The Committee considered and scrutinized the request in accordance with Rule 175(2f(bf of the Parliamentary Rules of Procedure.

2.O METHODOLOGY 2.1 Meetings a The Committee held meetings with the following: ].

ii.

iii.

The Minister of Finance, Planning and Economic Development; The Minister of Defence and Veteran Affairs; and The Parliamentary Sub-Committee on Classified Expenditure.

2.2 Documentary Review The Committee studied and made reference to the following documents: i.
The Minister of Finance, Planning and Economic Development's Brief to Parliament on the loan request; o ii.

The letter from the Minister of Finance, Planning and Economic Development on domestic borrowing for classified expenditure under the for FY 2OLBllg, d d 13tr, Ministry of Defence and Veteran Affairs December 2018 (Ref: DPI I841253105); and 1' 111 Su ntary Schedule 2, FY 2018119.

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t w Page l1 3.O BACKGROUND The Defence and Securit5r Sector plays a vital role in defending and protecting people and their properties, the sovereignty and territorial integrity of Uganda, as well as ensuring peace and security for socio-economic development.
It ensures that Ugandans enjoy freedom from threats, intimidation and other pressures from within or outside the country that would undermine the basic rights and welfare, the territorial integrity of the State, and the functioning of the systems of governance.

While the sector's capabilities have improved over time, there remain significant issues that need to be addressed.
The current peace and security that the country enjoys need to be consolidated, promoted and developed with focus on security of the country from any form of aggression, peace-building and conflict management, a through improving the capability of defence and security forces, and enhancing the defence and security infrastructure, among others.

Parliament approved UGX 32,7O7.82 billion for expenditure during FY 2018/19.
Out of this, UGX 9,517.9 billion was to be linanced through borrowing (UGX7,734 billion is from external financing and UGX 1,783 billion domestic borrowing).

By December 2018, UGX 605 billion (34%) had been raised from the domestic market leaving a balance of UGX 1,178 billion (66%).
a Of the approved budget for the Ministry of Defence for FY 2018/19, UGX 640.82 billion was approved for classified expenditure, of which the GoU appropriation is GX 637.56 billion while the externally financed appropriation is UGX 3.25 billion.

t should be noted that externally financed budget is for the UPDF Peacekeeping Mission in Somalia (AMISOM) while the GoU appropriation is distributed across various programs under the Ministry of Defence across the Country.

On 19s February 2019, the Hon.


Minister of Finance tabled before Parliament a - ' supplementary budget request which include UGX 380 billion to finance classified expenditure requirements.

The source of financing this additional budgetary additional domestic borrowing amounting to UGX 380 uirement is thro w PaBe l2 UN ns'z- billion.
It should be noted that defence classified expenditure has been growing over time - from UGX 347 billion in FY 2Ol7 118 to UGX 640 billion earlier on approved for FY 2OI8l 19.

This additional borrowing will see the budget for classified expenditure grow to UGX 1020 billion representing 34%o of the total defence budget for FY 2O 18/ 19 (incl.

netu proposed borowing).

This Financial Year, as part of the appropriation, the Net Domestic Financing of UGX 1 ,783 billion was approved.
However, an urgent need has arisen, which requires financing classified expenditure of USD 100 million (approximately equivalent to UGX 380 billion).

This expenditure was not budgeted for and is a fiscal deficit, since it is over and above the approved budget for this FY 2018/19.

These funds are required immediately, and since they cannot be raised by an increase in tax collection or external borrowing, all of which take long to accomplish, hence the request to borrow locally.
o 4.O OB.IECTIVE OF THE PROJECT The main objective of this project is to strengthen the capacity of the government to protect the country.

The specific objectives of this project are: i.

To improve the capability of Uganda's defence and security forces ; and ii.

To enhance Uganda's defence and security infrastructure.
o rM 5.O CONSISTENCY OF THE PROJECT qTITH THE COUNTRY STRATEGY The National Development Plan (NDP II) Defence and Security Sector objectives include: improvement of the capability of defense and security forces, strengthening of internal and external security, enhancement of defense and security infrastructure, enhancement of research and development, enhancement of production for wealth creation and self-sustainability, establishment of national service, improvement of administration, policy and planning.
Since the classified expenditure is meant to finance development related expenditure, it is associated with the third obj ective o cing defense and security infras ture / -*/.

@ Page l3 { This particular objective has three interventions namely: Develop and maintain Air Force physical infrastructure i. ii.

Construct and renovate administrative and operational Infrastructure iii.
Develop and maintain defence and security welfare infrastructure The Committee got assurance from the Parliamentary Sub-Committee on Classified Expenditure that these requirements are consistent with the Country's Strategy laid out in the NDP II.

6.0 PROJECTCOSTANDFINANCING The total budget for additional classified expenditure is estimated to be USD 100 million (UGX 38O billion) to be financed by borrowing from the domestic market.
7,O PROJECT INSTITUTIONAL IMPLEMENTATION The project will be implemented by the Ministry of Defence and Veteran Affairs, with its Permanent Secretary as the Accounting Officer responsible for managing the supply contract.

8.O BUDGETARYIMPLICATION Government has requested for supplementary funding for classified expenditure of UGX 380 billion FY 2ll8l 19.

The budget for classified expenditure under the Ministry of Defence will increase to UGX l,O2O.82 billion from UGX 64O.82 billion approved for FY 2018/9.
This will then increase the overall Ministry of Defence udget to UGX 2,385.16 billion from UGX 2,005.16 billion approved in FY 018/ 19. o o Consequently, this will see the budget deficit grow by additional UGX resulting in growth in Net Domestic Financing requirement to UGX 2,1 FY 2ol8l19 from UGX 1,783 billion earlier on approved by Parliament.

the domestic interest cost will increase by approximately U GX 39 billio 2 billion approved for FY 2018/ 19 to UGX 2,171 billion. )
ry 380 billion, 63 billion in In addition, n from UGX Page l4 -41^ @ ,.-:- - .

[],*l'r1 1f-i-/ I o 9.O THE LOAN AND THE CURRENT DOMESTIC DEBT SITUATION The stock of domestic debt has increased from UGX 5,424 .89 billion in FY 2016l17 to UGX 13,386 billion in FY 2017 118 (Table 1).
Table 1: Domestlc Debt Stock at Cost, UGX blllion FY 2ottlt2 2,tt2 4lYo T-Bi11s o/o of TotaJ T-Bonds 2,979 % of Total 59o/o Total 5,O91 FY 2OL2l13 FY 2Ot3lL4 tT 2OL4lL5 TY FY 2OL5lL6 2OL6l L7 2,O97 39010 3,326 6t% s,424 2,737 38o/o 4,442 620/o 7,2L3 3,025 J Z-/o 6,316 6AYo 9,341 3,358 3lo/" 7,526 690k 3,r49 27% 8,447 110/ FY zovlLa 3,523 260/" 9,863 7 4o/o 1O,884 11,595 13,386 Sourc€.'
DPI, hIoFPED (January, 2079) With an extra borrowing of UGX 380 bi11ion, the Net Domestic Pinancing (NDF) this FY 2018119 is expected to rise from UGX 1,783 billion that was approved in the current FY 2018/19 budget, to UGX 2,163 billion.

The domestic debt stock is expected to reach UGX 15,549 billion as at the end of FY 2018/19, based on this additional borrowing of UGX 380 billion when approved by Parliament.
1O.O OBSERVATIONS AND RECOMMENDATIONS 1O.1 LEGAL FRAMEWORK: i) The Committee noted that; a) the power to borrow or to lend is provided for under Article 159 of the 1995 Constitution, Article 159 of the Constitution is to the effect that Government shall not borrow, guarantee or raise a loan on behalf of itself or any other institution except as authorised by or under an Act of Parliament.
there is no law governing classified borrowing, and it is the first time Parliament is faced with a scenario where classified borrowing is brought .. to Pariiament for approval.

.0 tx -*Ll- -, Page l5 W':" llltJ, c) what is provided for under the Constitution is classified expenditure and the Public Finance Management Act, 2015 provides for the auditing of classified expenditure.
ii) The Committee was informed that it could not be given all the terms and conditions of the loan to be borrowed since this is borrowing for classified expenditure.

In light of the above, the Committee established that the Constitution in Article 159(B) mandates Parliament to enact a law to exempt certain categories of loans from the provisions of Clause (2) and (3) of Article 159, subject to such conditions as Parliament may prescribe.
Clause (2) and (3) mentioned above are to the effect that the terms and conditions of the loan shall be lald before Parliament, and shall not come into operation unless they have been approved by a Resolution of Parliament.

The Committee could not establish whether this is one of the loans that is envisaged under Clause (B) of Article 159, since this law has never been enacted by Parliament.
The Committee recommends that Government urgently Tables a Bill to provide for borrowing for classified expenditure.

1O.2 DOMESTIC DEBT STOCK: The Committee noted that domestic borrowing is intended to; bridge the ernment financing gap, operationalize Monetary Policy (Central Bank apitalization) and develop the financial markets.

As a result, Government in FY 2Ot2l13 started issuing Treasury Bills and Bonds for fiscal policy purposes.
Since then, the stock of domestic debt has increased from UGX 5,424.89 billion in FY 2016l17 to UGX 13,386 billion in FY 2Ol7 118.

( o o The Committee further noted that, based on the Domestic debt benchmark indicators provided in the Public Debt Management Framework of 2013, the by 0.3% from June 2077 to of domestic debt to GDP ratio i4creased esent -=+z* -- v' / wttr Page Lsw ,.fr, rt, ltv I June 20 18.

This implies that the domestic debt stock relative to the country's income is on the rise (Table 2).
Table 2: Domestic Debt Sustainability Benchmarks Bcachaart Ead Juoe 20L7 Ead Juoe 2018 Frcgcat Value of Doocatic d'ebt atoct/GDP Doareatic iaterest cost/Dozrestic reverrue le*cludiag graatsf Doaecrtic totercctl coet/Totel Gorcraaeat EryGaditusG <29% < 1 50/6 <l(yx 13.15% 13.48% 18.2 306 15.580/6 13.54% 11.20% Doaestic Debt etocL/Private Sector Credit <75o/o 99.550 101 .130,6 Source.'
BOU, Mo?PED Data o The ratio of domestic interest cost to revenue (excluding grants) has declined by 2.7o/o frorlr the previous year end June 2O17 although it remains slightly above the threshold, The interest cost has reduced the burden on domestic revenues, due to Government switch to longer term bonds.

The ratio of domestic interest on Government expenditure has exceeded its threshold of 1O%o.
Exceeding the threshold by l.2o/o in June 2O18 implies that the amount of resources available for allocation to other critical sectors of the economv is constrained.

WqL"^estic l"v I debt stock relative to private sector credit increased by l.6o/ofrom June 2077 to June 2018; and exceeded the PDMF threshold.

The increase was due to a higher rise in domestic issuance reaching l.8o/o of GDP.

Exceeding the threshold implies that Government domestic debt is constraining funding to private sector.
If this persists, private sector will be out competed by government for credit from the financial system.

-4/--, spite the improvements in contracting domestic debt of ganda still has a very high percentage (37%\ of its domesti ant refinancing risks.

sing the country to signific yeat longer term maturity, c debt maturing in one The ratio of domestic Page l7 il,[1^r ""$\ interest on Government expenditure has exceeded its threshold of 10% in the 2013 Public Debt Management Framework.
Exceeding the threshold by L.2o/o in June 2018 implies that the amount of resources available for allocation to other critical sectors of the economy is constrained.

The fiscal space of critical expenditures in the budget is reducing over time and therefore minimizing impact of any fiscal expansion by government.
The Committee therefore recommends that Government should develop and deepen the domestic financial sector to increase participation of the various sections of the economy in the domestic linancial markets.

This will entail implementation of the Tier IV Microlinance Institutions and Money Lenders Act,2O16, among others.

Increase in participation in the domestic financial markets will lower interest charged on domestic issuance.
o In addition, Government should limit domestic financing of the budget in the short run as the financial markets remaln shallow and underdeveloped with limited players in the secondary market.

The limited Goverument borrowing from the domestic market will consequently reduce the interest charged to private borrowers.

If Government is to continue borrowing domestically, then it should be on long-term bonds, Wr,.::ffT::".
:o.o,*,.o,,.thecapabi1ityofUganda,sDefenceandSecurity Forces and to enhance the defence and security infrastructure, notwithstanding the call for Government to urgently Table a Bill to provide for borrowing for classilied expenditure, the Committee recommends that the request by Government to borrow USD 100 million (UGX 380 billion) from the domestic ture under the Ministry of Defence and Veteran market to finance classified ex Affairs be a pproved.

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rufi,ft Mr, Page l8 REPORT OF THE COMMITTEE ON NATIONAL ECONOMY ON THE PROPOSAL BY GOVERNMENT TO BORROW USD 1OO MTLLION (APPROXIMATELY UGX 38O BILLIONI FROM THE DOMESTIC MARKET TO FINANCE CLASSIFIED EXPENDITURE UNDER MINISTRY OF DEFENCE AND VETERAN AFFAIRS FOR FY 2018/19 Hon.

Bbumba Syda Namirembe Nakaseke North ( Hon.

Bategeka Lawrence Hoima Municipalit5F- Hon.

Tavebwa Thomas Hon.

Kaj ara Aston Ruhinda North Mwenge South A Hon.

Yeri Apollo Ofwono Tororo Municipality Hon.


Kiwanuka Keefa Kiboga East Hon.

Seguya Lubyayi John Bosco Mawokota South Hon.

Musoke Paul Sebulime Buikwe North Hon.

Kabafunzaki Herbert Rukiga County Hon.

Ayepa Michael Labwor County Hon.

Katoto Hatwib Katerera County Hon.

Lokeris Samson Dodoth East ,<, /""'T Hon.

Rwemulikya Ibanda Ntoroko County Hon.

Migadde Robert Ndugwa Buvuma Islands fir 4.,.,,t\ 'I Hon.

Mandera Amos Buyamba County Hon.

Wamakuyu Mudimi Ignatius Elgon County Hon.


Okello Anthony Kioga County Hon.

Dhamuzungu Geoffrey Budiope East Hon.

Guma Gumisiriza David Ibanda North 20.

Hon.

Sematimba Simon Peter Busiro South I l\-, _J* I 9 10.

11. t2.

13. t4.

15. t6.

t7.

18.

19. o 2l 22 /14 24. nq 26.

27.

Hon.

Elotu Cosmas Dakabela County Hon.

Alvek Judith DWR, Kole Hon.

Turyahikayo K. M. Paula Rubabo County Hon.

Isala Eragu Veronica Bichetero Kaberamaido County Hon.
Azairwe Dorothy Nshaija K. DWR, Kamwenge Hon.

Akol Anthonv Hon.

Okupa Elijah Kilak North Kasilo County o 28.

Hon.

Ariko Herbert Edmund Soroti Municipality 29.

Hon.

Nzoghu William Busongora North 30.

Hon.

Bakireke Nambooze Bett5r Mukono Municipality 31. eo Hon.

Akena James Jimmy Lira Municipaiity Hon.

Baryayanga Andrew Aja Kabale Municipality oo.

Hon.

Katwesigre Oliver Koyekyenga DWR Buhweju 35 36 o 34.

Hon.

Akamba Paul Hon.

Atiku Bernard Busiki County Ayivu Counry Hon.


Okumu Ronald Reagan Aswa County Hon.

Kassiano Wadri Ezati Arua Municipality 38.

Hon.

Kutesa Pecos Onesmus UPDF Representative ll!

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